Composite Index Of Lagging Indicators

What is the Composite Index Of Lagging Indicators

The Composite Index of Lagging Indicators is an index published monthly by the Conference Board, used to assess the direction of the economy's movements over recent months.

A lagging indicator is a factor that changes following a particular pattern or trend in an economy. Traders look at lagging indicators as a means to assess or confirm the strength of a given trend.

The composite index is made up of the following seven economic components, whose changes tend to come after changes in the overall economy:

The value of outstanding commercial and industrial loans

The change in the Consumer Price Index for services from the previous month

The change in labor cost per unit of labor output

The ratio of manufacturing and trade inventories to sales made

The ratio of consumer credit outstanding to personal income

The average prime rate charged by banks

The inverted average length of employment

BREAKING DOWN Composite Index Of Lagging Indicators

The Composite Index of Lagging Indicators, given that it measures the economic activities of previous months, is used as an after-the-fact way to help confirm economists' assessments of current economic conditions. For this purpose, the Composite Index of Lagging Indicators is best used in conjunction with the Composite Index of Coincident Indicators and Composite Index of Leading Indicators.

Lagging Indicators and the Bigger Picture

The Conference Board maintains several composite indexes, tracking including leading, coincident and lagging indicators, to help offer an ongoing resource about the state of the U.S. economy.

"They are constructed by averaging their individual components in order to smooth out a good part of the volatility of the individual series," according to The Conference Board. "Historically, the cyclical turning points in the leading index have occurred before those in aggregate economic activity, cyclical turning points in the coincident index have occurred at about the same time as those in aggregate economic activity, and cyclical turning points in the lagging index generally have occurred after those in aggregate economic activity."

Lagging indicators can be complicated, and may sometimes tell more about the future of an economy than they do about the past, as Bloomberg noted in a May 2018 article. It started with the good news that the April unemployment rate of 3.9 percent was a 17-year low.

"For economists, the unemployment rate has always been a lagging indicator," Stephen Mihm wrote. "It’s like looking in the rear-view mirror. It tells us where the economy was in the not-too-distant past.

"But one could arguably view unemployment as a leading indicator, if a rather perverse one," he explained. "If you look at the relationship between the unemployment rate and the 10 most recent recessions in the U.S., it’s striking how quickly recessions follow in the wake of the economy hitting full employment."

Indeed, Mihm wrote, "one commentator who has crunched the numbers for the 10 recessions that have hit since 1950 found that the average time between troughs in the unemployment rate and the onset of recessions was approximately 3.8 months, with three recessions starting a month after unemployment hit its lowest level; the longest gap was 10 months out from the low point in joblessness. But that relationship, of course, depends on hindsight: We only know we’ve hit the trough in retrospect."

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